JEPQ: A Potential Outperformer in the Tech ETF Space

JEPQ: Good Chance It Outperforms QQQ Now (NASDAQ:JEPQ)

Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Learn More " Covered call funds that push out higher yields thanks to writing out of the money options continue to be all the rage, and no fund exemplifies this trend more than the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ). The fund has only been out there since May 2022, but it's raised a whopping $15.94 billion in assets. And you know what? Why not? It launched into the rising rate and a cycle through AI that just caused a moonshot of outperformance in the NASDAQ Composite Index (COMP:IND). JEPQ has two main goals: to create steady monthly income and to give investors a chance to profit from the growth-focused stocks in the NASDAQ 100-Index (NDX). To reach these goals, the fund uses a strategy based on options to work to help reduce the risk of losses while setting a limit on potential gains. This method allows JEPQ to shoot for an impressive income range of 9% to 11%, which is much higher than what many standard income-focused investments offer. What makes JEPQ unique is its emphasis on the Nasdaq 100, an index recognized for its higher allocations to sectors of the market that are growth-oriented. This sets it apart from its sister fund, JEPI, which concentrates on the broader S&P 500 (SP500). By zeroing in on Nasdaq 100 companies, JEPQ gives investors a chance to gain exposure to some of the market's most groundbreaking and fast-growing firms in the tech sector - where all the momentum is centered, JEPQ's portfolio matches the Nasdaq 100 Index. This means people who invest in it will have a lot of exposure to big tech companies like Apple, Microsoft, Amazon, and Alphabet as well as other fast-growing companies in areas like consumer discretionary and communication services. JEPQ's strategy with options makes its holdings more complex. It writes call options on its stocks to earn extra income. That means that the fund likely underperforms the Nasdaq 100 in unrelenting bull markets, but can generate outperformance because of the income generated from selling those call options as stocks drop. JEPQ concentrates on the Nasdaq 100, so its sector allocation tilts toward technology and communication services. This differs from broader market ETFs or its counterpart JEPI. JEPQ's tech-heavy nature can help - and hurt - it, offering higher growth potential but increasing volatility. And while the Nasdaq 100 includes some international firms, U.S.-based companies dominate it. So, investors should see JEPQ as a U.S.-focused investment, though it has significant global revenue exposure through its constituent companies' multinational operations. When you look at JEPQ next to similar funds, you need to think about regular Nasdaq 100 ETFs and other funds that focus on income. Compare it to something like the Invesco QQQ Trust ETF (QQQ), which just follows the Nasdaq 100. JEPQ gives you almost the same thing, but with a twist that brings in some added income. When we look at the price ratio of JEPQ to QQQ, we find that JEPQ has underperformed. Again - makes sense given the unrelenting bull market, whereby the selling of calls has limited up-capture. Having said that, I do think this outperforms QQQ going forward, given the potential for broader volatility in the Qs ahead. The appeal of JEPQ comes from its capacity to generate substantial monthly distributable income while giving investors access to some of the market's most energetic companies. The fund's options strategy adds a safety net, lowering ups and downs compared to investing in stocks on a pure basis. This can attract cautious investors or those close to retirement who want to keep money in stocks but with some protection against market drops. But remember, this strategy has its downsides. The income-generating and options overlay also limits potential gains. When the market is booming, JEPQ might not perform as well as a straight Nasdaq 100 index fund. Plus, because it's invested in tech and growth stocks, it's not as diverse as broader market ETFs. This focus on specific sectors can make it more volatile and risky if these sectors lose popularity. The JPMorgan Nasdaq Equity Premium Income ETF offers a good choice to investors who want to balance investing in the Nasdaq 100 while having income distributed throughout that journey. If you think tech and other cutting-edge industries will grow over time but want a relatively safer stock approach with high income, JEPQ might suit you. I think it's worth considering, not for the yield, but just because of the environment I suspect we are heading into.

JEPQ Offers A Hefty 10% Tech Yield

Looking for a helping hand in the market? Members of Cash Flow Club get exclusive ideas and guidance to navigate any climate. Learn More " Tech investors oftentimes want a lot of growth potential, but that goes hand in hand with relatively low dividend yields, as most tech companies offer no or low dividend payments. JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ) could be interesting for income investors who want tech exposure, as it offers a hefty 10% dividend yield, although investors should consider that the price appreciation is more limited compared to a regular Nasdaq or tech ETF such as QQQ (QQQ). I have not written about JPMorgan Nasdaq Equity Premium Income ETF in the past, but I covered JPMorgan Equity Premium Income ETF (JEPI) in 2022. JEPI and JEPQ have many similarities, including being managed by the same company and using a comparable strategy of selling covered calls to generate income that can be distributed to investors. JEPI does not have the same tech focus that JPMorgan Nasdaq Equity Premium Income ETF offers, however, which is an important difference. Thanks to trends such as working from home, cloud computing, the Internet of Things, and artificial intelligence, many tech companies have done very well over the last couple of years. The tech industry has outperformed the broader market easily over a longer period of time: Unfortunately, these tech giants offer very low dividend yields only -- none of the aforementioned yield even 1%, including the Nasdaq ETF QQQ. For income investors, such as retirees who live off the income their investments generate, these stocks and ETFs are thus not very suitable. It is possible to monetize one's investment over time by selling regularly, but that does not feel great for some investors, and it means significant work compared to just sitting back and collecting dividends. The JPMorgan Nasdaq Equity Premium Income ETF seeks to provide a solution, combining tech exposure with a very high dividend yield. Let's take a closer look. The top holdings of the JPMorgan Nasdaq Equity Premium Income ETF look like this (source: JPMorgan Nasdaq Equity Premium Income ETF top holdings fact sheet): The biggest names are tech stocks with large market capitalizations, such as Apple, Microsoft, NVIDIA, and so on -- there are no big surprises there. But with all of these stocks offering pretty low dividend yields or no dividends at all, JPMorgan Nasdaq Equity Premium Income ETF needs another source of income to be able to pay out the high dividends it offers to its owners. JEPQ sells covered calls on its holdings, which generates income via the option premiums that the seller of the option contract -- in this case JEPQ -- receives from the buyer of the option contract. JEPQ can then pay out this additional income that it receives over time to the ETF's holders. The dividends that JEPQ receives from its investments in stocks such as Apple provide some income as well, but not nearly enough to finance the ETF's large dividend payments. The majority of the "lifting" when it comes to generating income that can be turned into dividends is thus done via JEPQ's options selling. Selling covered calls is not a very risky strategy per se, in contrast to selling uncovered calls, for example, where investors can lose a lot of money. There is still a downside, however -- if an investor sells a covered call, his or her upside is capped. When a stock is doing very well and rises substantially in a short period of time, such as NVIDIA following some of its earnings releases in the last two years, then the covered call seller does not fully participate in those returns. That explains why JEPQ, despite being a tech-heavy ETF, did rise less than the Nasdaq ETF QQQ last year: Note: B1 is the return of the Nasdaq 100 ETF, F1 is the return of JEPQ at net asset value, and F2 is the return of JEPQ at market prices. We see that JEPQ's performance is highly compelling in absolute terms, as the ETF delivered a mid-30s return in 2023 alone. But the ETF still underperformed the Nasdaq 100 ETF, which delivered a massive 55% return last year. The fact that JEPQ caps the upside of its stock investments via the covered calls it sells has thus hurt JEPQ's performance last year, and investors would have generated a more attractive total return if they had invested in a plain and simple Nasdaq ETF such as QQQ. That being said, the capped upside is only a problem when stocks are rising sharply. In sideways markets, where stocks are not moving much, the capped upside is less of a problem, meaning JEPQ could be a stronger investment in choppy markets. In bull markets with strong share price appreciation, the capped upside is more of a hindrance, while the capped upside is not too much of an issue in a sideways market when shares are not rising sharply anyway. One could thus argue that JEPQ is an investment that is not overly suitable for a strong bull market, but that is better suited for sideways, choppy markets. It could thus be seen as a holding that helps prepare a portfolio for a recession or other macro headwind. The fact that JEPQ generates a lot of income also could help investors do better during recessions or market downturns, as investors might be less inclined to throw in the towel as long as they know that their holding will continue to provide a nice income stream. JEPQ's most recent dividend payment was $0.5569 per share, which, based on 12 dividend payments per year, pencils out to $6.6828 per year in dividends. The ETF trades for $53 right now, which would mean a dividend yield of 12.6%. Dividends are not always this high, however, as the premium that JEPQ receives for selling covered calls does, at least partially, depend on (implied) volatility. During times when equity markets are more volatile, such as this summer, option premiums and thus dividends are higher, while both option premiums as well as dividends are usually lower during times of less volatile equity markets. The last two months or so may thus not be overly telling, which is why we can alternatively look at JEPQ's reported SEC yield. According to its fact sheet, linked above, the 30-day SEC yield of JEPQ as of the end of July was 9.9%, while the 12-month rolling dividend yield was 9.7% as of the end of July. I believe that a forward dividend yield in the 10% range is thus relatively realistic, but I do not believe that investors should get used to a dividend yield of more than 12% -- even though the most recent dividend payment was very high. Even a 10% dividend yield is highly compelling, of course, especially if investors can also get some price appreciation on top of that -- in the past, that has been the case. When equity markets are very strong, the covered call strategy weakens returns, as selling covered calls caps one's upside. That being said, returns can still be nice, and for an investor with a yield focus, JEPQ has a lot to offer. In a sideways market, JEPQ's relative performance versus QQQ could be better, as the "capping the upside" effect of selling covered calls isn't as pronounced. JEPQ has a relatively low beta of 0.85, meaning it is substantially less volatile than both QQQ (with a beta of 1.1) and the broad market. So somewhat lower returns go hand in hand with lower volatility, making JEPQ more of a pick that could be right for risk-averse investors. JEPQ has an expense ratio of 0.35%, which is not very high for an actively managed ETF, and which seems very reasonable. With a market capitalization of $16 billion, JEPQ is an ETF with a very solid size. JPMorgan Nasdaq Equity Premium Income ETF is not a must-own, but the below-average volatility, the nice yield, and the potential for a better performance in sideways markets could make JEPQ interesting for risk-averse or income investors looking for some tech exposure.